2023 MTBPS preview: challenged fiscal outlook
On 1 November 2023, the Minister of Finance, Enoch Godongwana, will deliver the 2023 Medium Term Budget Policy Statement (MTBPS), providing an update of the medium- term fiscal framework. The 2023 Budget in February noted that major risks to the fiscal outlook were clustered around low (or no) economic growth which has implications for tax revenue and borrowing costs - especially in an environment of high interest rates and spending pressures from the wage bill, social relief of distress (SDR) grant, and SOEs. Some of these risks have materialised and, while the fiscal framework is materially challenged, we expect the fiscal authority to commit further to consolidation. Here, we review year-to-date (YTD) fiscal developments and implications for fiscal projections.
Economic growth weakness
We expect the MTBPS to keep the current-year growth forecast within the 0.6% to 0.9% range, broadly in line with our and consensus forecast of 0.7%. Meanwhile, medium-term growth projections will likely remain insufficient to lift employment and GDP per capita meaningfully as infrastructure constraints and weak external demand improve rather slowly. Near-term inflation and risks have trended on the upside of Treasury's projection of 5.3% for 2023 and 4.9% for 2024. As a result, inflation will likely be lifted higher, closer to our forecast of 5.9% and 5.0% over the corresponding time horizon.
Revenue affected by demand weakness and lower corporate profitability
In the fiscal year-to-date (April to August, hereafter FYTD1), gross tax revenue is 2.6% higher than the previous fiscal year but lower than Treasury's current full fiscal year projection of 5.6% y/y. At this time last year, gross tax revenue would have been up significantly by 10.5%, underscoring strong demand and a commodity price windfall. We expect gross tax revenue to undershoot Treasury's projection by around R54.8 billion. Within gross tax revenue:
Considering SACU payments, which are up by 82.7% (or R18.1 billion) FYTD, and departmental revenue, down 14.5% y/y FYTD, main budget revenue could undershoot by around R42 billion. Meanwhile, non-interest expenditure is likely to be contained. The combination is a wider budget deficit, higher debt, and service costs that could overshoot Treasury's projections by close to R20 billion. To insulate the consolidation path, Treasury could drawdown contingency reserves and potentially implement significant baseline reductions. However, even if these reductions are not materially different from under- spending in previous years, they would further undermine a much-needed improvement in service delivery.
Overall, the fiscal outlook presented at the 2023 Budget is challenged. The main budget deficit could widen further to around 5.1% of GDP in 2023/24 compared to Treasury's projection of 3.9% of GDP. With lacklustre economic growth and swelling spending pressures, the deficit will likely remain wider over the medium term. This, together with the already committed R254 billion Eskom debt relief and looming large redemptions, implies that government gross debt could be shown to stabilise at a higher level in 2025/26, if not significantly beyond.
Week ahead
On Monday, data on private sector credit extension (PSCE) for September will be released. In August, PSCE expanded by 4.4% y/y, slower than the 5.9% expansion in July. Credit extended to corporates slowed to 3.2% y/y from 5.7% previously, while household credit growth also moderated to 5.8% y/y from 6.0% in the previous month. Overall, the general slowdown in PSCE growth is consistent with restrictive monetary policy and tighter lending standards. In the household sector, data suggests that demand for unsecured credit, particularly credit cards, remains robust, both in bank and non-bank sectors.
On Tuesday, the trade balance for September will be published. In August, the trade balance recorded a R13.28 billion surplus, reflecting a marginal compression from the R15.44 billion surplus in July. Export values expanded by 4.5% m/m to R181.26 billion, while imports expanded strongly by 6.3% (from a lower base) to R167.98 billion. The cumulative trade surplus amounted to R32.02 billion in August, a significant compression from the R160.46 billion in the corresponding period last year. This is consistent with our expectation of a wider current account deficit.
On Wednesday, the Absa manufacturing PMI data for October will be released. After rising to 49.7 index points in August, the PMI retreated in September, falling by 4.3 points to 45.4. This reflected a sharp decline in new sales orders to 35.3 from 45, indicating that demand for manufactured products weakened in September. The PMI business activity (a proxy for supply) fell by 8.1 points to 41.9, signalling a likely monthly decline in manufacturing production over the reference month. Nevertheless, manufacturers became more optimistic about near-term operating business conditions.
Naamsa will also release data on new vehicle sales for October on Wednesday. Total new vehicle sales volumes (not seasonally adjusted) declined by 4.1% y/y in September, reflecting further weakness after declining by 3.0% y/y in August. Aggregate sales volumes amounted to 46 021 in September, reflecting a slight uptick of 0.6% m/m (or 294 units). Weakness in passenger car sales continued, underscoring the ongoing impact of higher interest rates and vehicle price inflation. In contrast, commercial vehicle sales were more supported, recording solid 16.0% YTD growth.
On Thursday, data on electricity generated and available for distribution for September will be published. Electricity generated (production) declined by 6.4% y/y in August, marking almost two years of annual decline. However, seasonally adjusted electricity production expanded by 0.9% m/m, following a 2.1% monthly decline in July. In the three months to August, seasonally adjusted electricity production expanded by 1.0%, providing an early signal of a likely positive quarterly contribution to 3Q23 real GDP growth. Encouragingly, electricity generated by "other" producers has risen rapidly and reached an all-time high in August, accounting for about 15% of total reported electricity production. In addition, the earlier-than-expected return of Kusile Units is positive for Eskom's generation capacity and consistent with our assumption that load-shedding intensity might have peaked this year.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 24 Oct | SA | Leading Indicator | Aug | 110.9 | 110.4 |
| 26 Oct | SA | Headline PPI % m/m | Sep | 1.5 | 1.0 |
| SA | Headline PPI % y/y | Sep | 5.1 | 4.3 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 30 Oct | SA | Private sector credit extension % y/y | Sep | -- | 4.4 |
| 31 Oct | SA | Trade balance R bn | Sep | -- | 13.3 |
| 1 Nov | SA | Absa manufacturing PMI | Oct | -- | 45.4 |
| SA | Naamsa new vehicle sales % y/y | Oct | -- | -4.1 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 69,930.52 | -1.5% | -3.7% | 4.2% |
| USD/ZAR | 18.96 | -0.3% | -0.6% | 5.7% |
| EUR/ZAR | 20.02 | -0.5% | -0.7% | 10.8% |
| GBP/ZAR | 22.99 | -0.4% | -0.8% | 10.3% |
| Platinum US$/oz. | 900.25 | 1.1% | -0.4% | -5.4% |
| Gold US$/oz. | 1,984.82 | 0.6% | 4.4% | 19.2% |
| Brent US$/oz | 87.93 | -4.8% | -6.4% | -8.1% |
| SA 10 year bond yield | 10.70 | -1.7% | -0.7% | -0.3% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f |
|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.7 | 1.1 | 1.7 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 1.1 | 1.3 | 1.2 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 5.3 | 3.3 | 4.3 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.8 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.4 | 4.5 | 4.9 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.10 | 17.50 |
